Reinsurance rates continued to increase for the U.S. property-catastrophe reinsurance market at the April 1, 2009 renewal, extending the trend that began at the beginning of the year. National programs were up 10 percent to 14 percent on a risk-adjusted basis, with those in the Northeast seeing 6 percent to 8 percent increases. This compares to a reinsurance rate increase of 11 percent on average at the January 1, 2009 renewal.

Capacity needs, regions, and specific perils ultimately influenced the final rates that insurers were able to secure.

Year-over-Year Pricing Continues to Rise

Relative to 2008 firm order terms (FOTs), prices were up 14 percent to 16 percent year-over-year for higher layers and 10 percent to 14 percent for lower layers. For programs focused on the Northeast, lower layer FOTs were up only 4 percent to 6 percent from April 1, 2008, and higher layers saw increases of 8 percent to 10 percent.

The competitiveness of the market place can be measured by the ratio of FOTs to average quotes. In a competitive market, this ratio tends to be relatively low, as the market ends up accepting FOTs that are considerably below their quotes. For the national U.S. market as a whole, FOTs ended up at 94.8 percent of average quotes, about equal to the same ratio calculated at the January 1 renewal, indicating no change in the competitiveness of the market this year. Discounts were more pronounced for the Northeast, where higher-layer FOTs were discounted 8 percent to 10 percent relative to quotes, with lower layers at 10 percent to 12 percent discounts.

Pricing trends at this renewal were influenced substantially by the reduced availability of capacity, especially for perils in historically capacity-constrained zones and program-specific loss histories. Capital has undoubtedly been constrained, and this has had an impact on reinsurance pricing. Further, some reinsurers have already used up their allocated capacity for transactions other than renewals and in certain cases are having to reduce renewal lines as well.

Using the Guy Carpenter Global Reinsurance Composite as a proxy for capital availability, shareholders’ funds dropped 18 percent last year — reflecting lost capital of USD19.7 billion. Unrealized losses on investment assets were largely responsible for the decline in capital, accounting for 53 percent of the decline in shareholders’ funds in 2008. Share repurchases and dividend payments resulted in the depletion of capital as well, though most programs were suspended by the end of last year.

Capital is likely to continue to be constrained in 2009. Though the efforts of several insurers to raise capital have been successful — and dividends and buybacks have come to a virtual halt — uncertainty in financial markets could continue to impair investment assets this year. Concerns about the ability of carriers to replenish their balance sheets may not be as daunting as some have expected. Nonetheless, the ability to secure additional capital does depend on specific companies and lines of business.

Due to significant concern for continued price increases and constraints in capacity, many Florida renewals are already underway. While the ultimate structure of the Florida Hurricane Catastrophe Fund (FHCF) and whether it will purchase its own reinsurance is still to be determined, the outcome of the current Florida legislative session and the decisions by the FHCF Trustees could have a profound impact on the market. Though it is not likely that any statutory decrease in the Temporary Increase in Coverage Limit (TICL) in 2009 will be material, it currently remains unfunded.

In order to address the FHCF’s significant gap in coverage, discussions are underway with the U.S. Department of Treasury. There is also a push to statutorily allow insurers to recoup the cost of purchasing additional reinsurance within the TICL layer should funding for TICL remain in question. Insurers considering entering the market late with the hopes of securing lower, last-minute rates are unlikely to accomplish their objectives. As capital is still constrained, early action will be crucial to managing the cost of coverage.